Have you heard of a CD as an investment tool? CD or a Certificate of Deposit is one of the oldest banking instruments. It is like a savings account but with higher interest rates and a fixed investment amount.
Let’s learn the meaning of a certificate of deposits, features and more here.
What is a Certificate of Deposit (CDs)?
A certificate of deposit is a type of deposit where you get higher interest than a savings account. A CD is a negotiable money-market instrument (i.e. for short term of up to 3 years) and is issued only in dematerialised format.
- Minimum Investment Amount: Rs 1 lakh (in multiple of Rs 1 lakh thereafter)
- Maximum Investment Amount: (Banks have the freedom to issue CDs depending on their funding requirements)
- Tenure: For banks – 7 days to 1 year; For FIs – 1 – 3 years
- Loan: Not available
How does a CD work?
You put in a specific sum of money (minimum Rs 1 lakh) with any of the central banks or financial institutions in India (as per the RBI regulations) and you are promised a pre-fixed rate of interest.
This amount is kept with the bank just like you put money in a fixed deposit. The issuing authority gives you a certificate which is the Certificate of Deposit to be kept for future reference.
The money in this CD account keeps on earning interest for the time being and once the account completes the tenure, you can cash it.
Who can Issue a Certificate of Deposit?
The certificate of deposit can be issued by:
- scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}
- select All-India Financial Institutions (FIs)*
*{that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI}
Who can Invest in a Certificate of Deposit?
The following persons can purchase a certificate of deposit (CD), as per the RBI guidelines:
CDs can be issued to:
- individuals
- corporations
- companies (including banks and PDs)
- trusts, funds, associations, etc.
Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.
Source: Master Circular – Guidelines for Issue of Certificates of Deposit
Certificate of Deposit (CD) vs Fixed Deposit (FD)
| Particulars | Certificate of Deposit (CD) | Fixed Deposit (FD) |
| Min. Investment | Rs 1 lakh | Rs 1,000 (may be higher for some banks like PNB and HDFC) |
| Tenure | 7 days to 12 months (may be higher for Financial institutions for up to 3 years) | 7 days to 10 years |
| Interest Rate | Usually not more than 4-5% | FD interest rates can go up to 9% (Check latest FD rates) |
| Loan availability | No | Yes |
CD vs Commercial Papers
| Particulars | Certificate of Deposit (CD) | Commercial Papers |
| Issued by | Financial institutions and central banks only (permitted by RBI) | Primary dealers, large corporations and all-India financial institutions |
| Min. Investment | Rs 1 lakh | Rs 5 lakhs |
Benefits of Investing in a Certificate of Deposit
Here are some benefits of investing in CDs:
- Secure investment option
Certificates of deposit are a safer investment plan instrument than bonds and equities, as CDs are not subject to the volatility of the financial markets. These are backed by the government of India and regulated by the apex-body of RBI.
- Fixed rate of interest – guaranteed returns
Certificates of deposit feature a fixed interest rate that remains the same throughout the period of the investment, allowing investors to plan ahead.
- Higher returns than a savings account
Certificates of deposit offer higher profit rates than savings bank accounts and have a fixed earning potential.
- Secure short-term investment option
CDs has a limited maturity term, which means that the money invested will only be non-recoverable for a short time. They have a unique plus point, and they offer handsome returns for higher maturity terms. In addition, prolonged investment in CDs at different periods yields consequential returns and provides more liberation.
Certificate of Deposit: FAQs
CDs are good for short-term investment; Fixed rates offer guaranteed returns and usually do not have fee.
Certificate of Deposit in Hindi is known as जमा प्रमाणपत्र.
There is no lock-in period for a CD. (Source)
Certificates of deposit are issued by commercial central banks and selected financial institutions in India as allowed by the RBI within a limit.
No. Regional Rural Banks and Local Area Banks cannot issue a Certificate of Deposit.
CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts, funds, associations, etc. NRIs can also invest in CDs but on a non-repatriable basis.
Yes, CDs are one of the safest investment instruments regulated by RBI.
You must open a Certificate of Deposit when you’re looking for a dependable return but don’t wish to lock your money for a longer period.
At the maturity of the CD, the depositor needs to decide what to do with it. If the depositor does nothing, the bank renews the CD for the same term.
Your CD will roll over automatically unless you instruct your bank otherwise. However, it gets renewed at the prevailing rate, which could be higher or lower. For this reason, you must know the current interest rate and then decide if you need the deposit to roll over.
In case you need to withdraw Certificate of Deposit money early, you will have to pay a fee called ‘early withdrawal penalty’.
